Responsible Investment Banking

Guest Blog Post by William Maize about the Workshop "Responsible Investment Banking" at TBLI CONFERENCE EUROPE 2015 in Zurich. The moderator, Karen Wendt: Editor at Responsible Investment Banking was joined on the panel by Britta Rendlen: Head of Sustainable Finance at WWF Switzerland, Olivier Jaeggi: Managing Partner ECOFACT AG, Rene Nicolodi: Head of Equities & Themes at Zurcher Kantonalbank, Pierin Menzli: Head of Sustainable Investment Research, Bank of J. Safra Sarasin, and Arthur Wood, Founding Partner at Total Impact Capital.Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE.

When you hear the words “Investment Banking”, does the word “Responsible” come to mind? I had never contemplated these themes to be complementary. Time to change my mind?

Karen Wendt got the talk started with a question for Britta Rendlen of WWF Switzerland: If an alien were to study how humans made investments on earth, what would they say? Britta’s response cut to the point; “current economic growth utilizes resources at a rate of 1.5 earths. If growth continues at the same rate, resource consumption will reach a rate of 3 planets by 2030. Any intelligent alien life would say; “hey this is just not sustainable.”

Next to speak was Olivier Jaeggi, who rebutted our alien investor friends by suggesting that big banks are trying to address this resource-use issue and questioning if secondary banks, institutional and smaller asset managers are really doing enough. Most big banks now recognize the reputational risks associated with breaching an accord by the high commissioner of human rights suggesting that the provision of minimal human rights and other social requirements apply even with minority ownership.

Rene Nicolodi explained that Environmental, Social, Governance standards and guidelines (ESG) are not only followed for regulatory requirement, but because clients demand it. ESG metrics also provide greater insight about investment risk and opportunities compared with a traditional investment process. “It is simply the right way to look a business models and analyze companies for long-term sustainability.”

Next up, Pierin Menzli shed some light on history of sustainable investing in Switzerland and how it started with the Basel chemical spill. Reputational risk forced the financial industry to re-think ethics of investment and minority ownership, remembering; “equity is partial ownership.” Clients now want to detect certain risks that are not identified in traditional analysis. Pierin downplayed rumors that could achieve better performance through using ESG, placing more importance on execution, analysis, portfolio construction. A client needs to bring the belief to the table.

Arthur Wood roared into the conversation by debugging the myth that the finance sector is not involved in this space and drew an example; over one trillion dollars invested in ESG funds. He also highlighted that current mechanisms for financing fiscal and social budgets are fundamentally flawed, if not bankrupt. So how to we handle this? Arthur suggests that impact investors need to look beyond the traditional VC/PE model and engage entirely new capital markets. Furthermore, it is critical to develop investment banking models in the impact space and then, to simply follow the money! Land ho! Instruments such as Social Impact Bonds create opportunities for collaboration between markets and social impact communities, and estimated that there is between 2 and 9 trillion in local capital funds that could be tapped into. Water and sanitation alone contribute a 650 billion dollar market.

Britta followed up with a great point. Simply lowering your portfolio’s carbon exposure by divesting assets should not be called impact investing. Real impact is not created here! You are simply selling carbon-heavy shares to someone who does not value a low carbon economy. Impact, other the other hand, should be felt on the ground!

Karen re-engaged the audience with a question, asking; “So if there is sufficient capital in circulation, how do we incentivize money to flow to impact investing?” A gentleman quickly jumped in, stating his concern over donor advised funds (DAF) being used as a tax haven rather than a charitable mechanism, as there are often no incentives for a DAF to give any payments across. Therefore an investment mandate is key to guarantee flow of the charitable funds to the impact community on the ground.

Arthur, whom a more adventurous blogger could describe as an architect of anecdotes, suggested the problem is that impact is typically small in scale, fragmented, expensive, and found in places you cannot get a good lunch - the antithesis of what Bankers enjoy. However, he elaborated that micro finance and green bonds are instruments that resemble traditional finance well enough to have been accepted by the traditional community, and have therefore grown into the mainstream. Impact cannot depend on the social angle for scale, but the standardization into mainstream.

Olivier re-entered the discussion by issuing a firm warning for the incumbent financial sector; “Somebody needs to finance climate mitigation, food, infrastructure, and the fiscal deficits of the future If banks don’t want to do it, it will be the Googles and Apples that respond to the real need to finance these models. Pierin agreed with Olivier, drawing a comparison to innovation in the pharma industry that has been driven by small players. Finance should look to the technology sector for innovation.

Pierin also described his view on the inertia within institutional firms; “The global dilemma of climate change may be at its peak with the media, but when talking to large institutional funds they have never heard about climate risks or stranded assets.” I thought this was a rather worrying piece of industry insight considering the collective specialists all stressed institutional by-in is important for mainstream adaptation and large scale investment in a sustainable future.

Rene suggested that the main problem facing institutional investors is in how are they paying pensions. There may be an investment case, however it is very hard to communicate this with the big institutional funds. Britta expressed having a similar experience with pension funds, whereby WWF has launched an index of Swiss Pension Funds on their ESG ratings in order to encourage a shift toward and facilitate a dialogue about impact investing. In the UK a similar initiative has helped greatly to shift pension funds toward ESG opportunities.

At this point in the roundtable, it was hard not to feel a collective depression surrounding the willingness of institutions to acknowledge ESG or impact investing as a viable option in Switzerland or elsewhere. So what is the solution?

Rene suggested that active engagement strategies may be the only way and Britta agreed that engagement is key and would be much more effective than a divestment strategy. There needs to be opportunities, standardization, and transparency. All are key cogs needed to attract capital from institutional investors to the green economy.

Arthur reintroduced the elephant in the room, carbon markets, saying that if coal and oil companies burn the reserves on their balance sheets, we, the world, will burn by 6 degrees celcius. Institutional funds have coal and oil in their portfolios. Furthermore, what are the externalities of consuming three planets? Lets move away from the PE/VC model and create new models for impact investing to really make a difference.

A member of the audience identified the issue as one of change management of a lack of leadership. To counter, Rene introduced regulation for the first time into the discussion, stating that banks and institutions are required to hold a certain level of reserves. A reality is that they are stuck in what they do. Karen agreed that a missing layer is regulation for sure, however Arthur agreed with the audience member that leadership among for-profit investors only see the fragmented side and says that I cannot make money with this. What role does regulation have to play, and is Government regulation on banks since the crisis a contributing factor hindering a mainstream shift toward impact investing.

Karen wrapped up the roundtable by asking each speaker to make a wish for the sector:

Rene wished that the pure institutional investor become more flexible and recognize the long-term risks that they are facing. Pierin, deciding that wishes weren’t his thing, warned not to convince unconvinceable asset owners (ie pension funds) but target people (families, asset funds, insurance companies) which have a different attitude and interest in where they allocate capital. Arthur wished investors would apply all of their balance sheet to impact investing. He predicts the corporate sector may act first and be the savior. Olivier reiterated that ESG helps assess risk much better. Britta simply wished that we all find the time to go out in nature and disconnect; to understand how important the natural world is for our survival, and that we wouldn’t need this discussion at all! Agreed Britta!

Karen’s final statement addressed the future leaders in the audience, asking those under 30 years old; “What do you wish for?”

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